Currency may be defined as a unit of exchange, facilitating the transfer of goods and services. It is a form of money, where money is an efficient medium of exchange, and may also be considered as a store of value, created through a claim to a central bank, agency or government.
A synthetic currency is a unit of measure of economic value that is not backed by any central government, any central agency or any central bank (hence the use of the term “synthetic”). The value of a synthetic currency can be defined as a function of the value of other assets (e.g., other currencies). A synthetic currency can have a set of additional measures that help define its characteristics, such as an interest rate that describes how much it costs/returns to borrow/invest the currency from/with third parties.
Synthetic currency may serve many purposes. For example, a country may peg its currency to the U.S. dollar (or euro, etc.) but, for political, cultural, social or other reasons, would prefer to peg to a basket of currencies or a synthetic currency that does not contain the dollar but whose value could move with the dollar over time. Synthetic currency may also be used by large firms (whether public or private) and national governments to issue global bonds or other securities for their own financing purposes, so as to cater to investors' nationalistic, investment or political preferences. Also, synthetic currencies may be used to study currency movements. A synthetic currency may also be used in any economic transaction to the extent that it provides a unit of measure that facilitates such transactions.
Additionally, as the size and popularity of foreign exchange markets have grown, investors have formulated strategies for maximizing yield in these markets. One such strategy exploits extended periods of exchange rate appreciation by higher yielding currencies, known as “forward bias”, by investing in these high-yielding currencies. A popular form of this investment strategy is the carry trade, in which an investor takes a short position by borrowing in a low-interest rate currency, such as the U.S. dollar, and then takes a long position in a higher interest rate currency, such as the Australian dollar. With a carry trade, an investor essentially bets that the exchange rate will not change so as to offset the interest rate differential.
Accordingly, there is a need for a system and method for generating synthetic currency that takes advantage of the benefits offered by the carry trade strategies.